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Thursday, July 21, 2011

The Persuasive Power of Opportunity Costs

Shane Frederick wrote a nice short article in the January-February 2011 issue of the Harvard Business Review on "The Persuasive Power of Opportunity Costs." He points out that framing choices by making opportunity costs explicit can persuade people to make certain choice--especially because the opportunity costs can be chosen to appear large or small. Opportunity cost, of course, is one of the first concepts taught in any intro economics course.

Here's an example from Frederick where the explicit opportunity cost appears large:

"While shopping for my first stereo, I spent an hour debating between a $1,000 Pioneer and a $700 Sony. Perhaps fearing that my indecision would cost him a sale, the salesman intervened with the comment "Well, think of it this way--would you rather have the Pioneer, or the Sony and $300 worth of CDs?"

Wow. The Sony--and by a large margin. Twenty new CDs were too great a sacrifice for the slightly more attractive Pioneer. Although I could subtract $700 from $1,000 and was capable--in principle--of recognizing that $300 could be used to buy $300 worth of CDs, I hadn't considered that until the salesman pointed it out."

Here's an example from Frederick where the opportunity cost is framed to sound small:

"[Here's a] strategy for those offering expensive products or policies: Cast the opportunities given up as something unattractive or unimportant. An ad by De Beers did this brilliantly. It depicted two large diamond earrings with the tagline "Redo the kitchen next year." Clever. It implied that the cost of the diamonds was merely a slight delay in a renovation. In fact, if a consumer spent the money reserved for the kitchen on the diamonds, it might take him or her much more than a year to save that amount again."

And here's a political example of making opportunity costs explicit, from the 1953 "Chance for Peace" speech given by President Dwight Eisenhower, who said:

"The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.…We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people."